I remember being in a conference with Ludwig von Mises in the sixties at FEE [the Foundation for Economic Education]. And I asked him about Friedman and economics. And he waved his hand in the typical Austrian way and he said: “Friedman is not an economist. He’s a statistician.”
Now in describing Friedman in these terms, Mises was not name calling but had a very specific meaning in mind. For Mises (pp. 247-48) a “statistician” was someone “who aim[s] at discovering economic laws from the study of economic experience.” But Mises maintained that statistics is not a method useful for research in economic theory because it deals with historical facts. According to Mises:
Statistics is a method for the presentation of historical facts concerning prices and other relevant data of human action. It is not economics and cannot produce economic theorems and theories. The statistics of prices is economic history. The insight that, ceteris paribus, an increase in demand must result in an increase in prices is not derived from experience. Nobody ever was or ever will be in a position to observe a change in one of the market data ceteris paribus. There is no such thing as quantitative economics. All economic quantities we know about are data of economic history.
Indeed in his magnum opus, A Monetary History of the United States, co-authored with Anna Schwartz, Friedman confirmed the accuracy of Mises’s characterization. In their Preface (p. xxii), Friedman and Schwartz stated that their aim in writing the book was “to provide a prologue and a background for a statistical analysis of the secular and cyclical behavior of money in the United States and to exclude any material not relevant to that purpose.” In the final chapter, entitled “A Summing Up,” the authors (Friedman and Schwartz, p. 676) listed three propositions regarding money that they discovered to be “common” to U.S. monetary history and concluded, “These common elements of monetary experience can be expected to characterize our future as they have our past.” It would be difficult to find a better expression of the statistician’s view of the social world.
. . . asked Tony Durden at Zero Hedge the other day. His answer: the Treasury Borrowing Advisory Committee to the US Treasury chaired by Matt Zames of J.P. Morgan. Durden discovered the following passage by Friedrich Hayek quoted in the TBAC’s quarterly refunding presentation made at the beginning of May. Here it is as found on p. 86 of the appendix of the slide show presentation:
“There can be no doubt that besides the regular types of the circulating
medium, such as coin, notes and bank deposits, which are generally
recognised to be money or currency, and the quantity of which is
regulated by some central authority or can at least be imagined to be so
regulated, there exist still other forms of media of exchange which
occasionally or permanently do the service of money.
Now while for certain practical purposes we are accustomed to
distinguish these forms of media of exchange from money proper as
being mere substitutes for money, it is clear that, other things equal, any
increase or decrease of these money substitutes will have exactly the
same effects as an increase or decrease of the quantity of money proper,
and should therefore, for the purposes of theoretical analysis, be counted
Friedrich Hayek, Prices and Production 1931 – 1935.37
Durden concluded with the following ruminations:
That’s right: it would appear that the long hand of Austrian economics has penetrated deep into the narrative offered by the JPM and Goldman-chaired TBAC.
But… if that is the case, and if indeed the Treasury’s advisors are fundamentally at heart, Austrian, then that would diametrically change the entire ballgame. Simply because it would mean that whoever wrote the TBAC’s most recent slideshow understand perfectly well that the path the US has set off on is not only not going to have a happy ending . . . but will, naturally, end in tears.
So, one wonders: is that precisely what JPM and Goldman (the two heads of the TBAC) have had in mind all along?
And if so, one also wonders just how they really feel about gold…
Three of the four largest banks in Sweden continue to phase out the manual handling of cash at their branch offices at a rapid pace, according to recent data reported today in Naringsliv, a leading Swedish Money and Finance newspaper insert. Taken together, Swedbank, Nordea, and SEB, have stopped offering cash services at their branches at the rate of three branches per week since 2010. Thus during the period 2010-2012, cash disappeared from 465 Swedish bank branches. At Swedberg bank, only 75 of its 340 branches still handle cash.
Leif Faithful, Head of Financial Infrastructure at the Swedish Bankers’ Association, believes that eventually all Swedes will need a bank card and sees this development as beneficial to “both consumers and trade.” Odd that he does not mention the great benefit to the banks of revenues generated by the cards and the fact that with few bank branches paying out cash it makes fractional-reserve banks much more secure against bank runs during crises generated by the credit expansion of these same banks. Nor does he mention the obvious benefits from the spread of electronic transactions that will accrue to the Swedish government, which will have much greater ability to snoop into and monitor the private financial dealings of its citizens
Fortunately, one heroic Swedish bank among the largest four, Handelsbanken, has resisted this pernicious trend toward abolishing cash and empowering the government and the fractional-reserve banking cartel at the expense of the public. From early 2010, Handelsbanken has actually increased the number of its branches that handles cash and today all 461 branches do so, but with a limit of $15,000.
HT to Per Bylund.
The AEI, a centrist-establishment think tank, published a compelling policy study this week by Timothy P. Carney. The Case against Cronies: Libertarians Must Stand Up to Corporate Greed is a hard-hitting critique of crony capitalism that goes beyond merely recounting the ubiquitous and shameful instances of gigantic U.S corporations seeking and obtaining subsidies and monopoly privileges from Big Government at the expense of taxpayers, consumers and more efficient competitors. Indeed, Carney calls into question the conservative mantra as classically enunciated by Milton Friedman: ‘The social responsibility of business is to increase its profits.” Not so fast, Carney says. For what if investing in lobbying for a government subsidy or political barrier to entry is the best way for a corporation to increases its profits? Isn’t such behavior not only ethically dubious, but also inconsistent with the free market? While Carney does not formulate a libertarian standard of corporate responsibility to replace Friedman’s, he does make a powerful case that it should include explicit prohibitions against violating the principles of the free market. As Carney concludes:
Conservatives are good at criticizing the government for picking winners and losers — and they’re right to do so. Politicians and bureaucrats cannot allocate resources as efficiently as the market. The free market is the greatest welfare program ever invented.
But if the free market is worth protecting, conservatives must do a better job calling out corporations that participate in cronyism, as well. Doing so will raise tricky questions for conservatives. To what standard must we hold companies? What is ethically acceptable and what is not? . . .
When the ethanol industry writes an ethanol mandate, or H&R Block hatches a policy that crushes its small competitors, it’s legal. But it’s also a naked attempt to extract money from unwilling payers, restrict the freedom of competitors, and deny options to customers. This is the sort of behavior conservatives and libertarians need to denounce.
While Carney concedes that there is a grey area in practically judging corporate behavior in a mixed economy that raises some tough questions, he insists “these are questions free-market folks need to start discussing. . . . even if it means using the language of corporate social responsibility.”
It appears that the Fed’s zero-interest-rate and QE policies have finally achieved its insane goal of re-igniting a housing bubble.
The Case-Schiller 20-City Index shows that housing prices increased by 1.2 percent in February and 9.3 percent year-over-year. All cities included in the index experienced substantial gains, which have been driven by staggeringly large increases in the bottom tier of the market. In Phoenix housing prices rose by 23 percent over the past year, but by 39 percent in the bottom third of the housing market. Las Vegas home prices were up by 17.6 percent in the past year while prices for houses in the bottom tier rose by 34.2 percent, and at an annual rate of 56.2 percent in the last three months. In Atlanta, bottom-tier home prices rose 36 percent year-over-year and at an annual rate of 70 percent in the past three months.
In light of the current data, Dean Baker, one of the few left-of-center economists to issue an early warning about the last housing bubble, sees signs of a renewed housing bubble on the horizon:
This rapid increase in house prices should be prompting serious concern among regulators. At the moment, it is not driving the economy in the same way as the housing bubble did in the last decade. Construction is still at very low levels, so a plunge in prices could not have impact on the economy through this channel. While saving rates are again low, possibly due in part to increasing home equity, it is likely that the data are somewhat distorted by the large dividend payouts of the fourth quarter. If the saving rate remains below 3.0 percent into the second half of the year (the post-World War II average is more than 8.0 percent) then this would suggest that inflated house prices are playing a role. If that is the case, a decline in house prices would lead to another hit to consumption.
However the main reason that the rapid run-up in prices in the bottom tier should be a cause for a concern is that moderate-income homebuyers may again take a big hit if these prices plunge in a correction.
For some compelling anecdotal evidence on the high-end market, consider this. Crain’s reports on the sale of three condos sold in the Gretsch Building, a former guitar factory in Williamsburg, Brooklyn:
Two of the condos, adjacent two-bedrooms on the ninth floor, closed this week for $1.4 million and $1.5 million, while a larger two-bedroom on the 10th floor will close next week for $2.5 million.
The units averaged $1,150 per square foot. That compares to a building-wide average of $750 a foot, though recent listings have topped out around $900 per square foot, according to StreetEasy—a clear sign of the soaring local market.
“It’s unbelievable, what’s going on out there,” declared the real estate agent involved in these deals.
Commenting on this story at Zero Hedge, Tyler Durden writes:
Great job Bernanke & Co. You have succeeded at rolling up the housing, credit, bond, tech and equity bubbles all into one. Watching the glorious unwind of all this unprecedented academic-created stupidity will be worth the hyperinflated price of admission alone.
Right on, Tyler.
In a recent review of David Stockman’s new book, The Great Deformation, Bloomberg columnist Clive Cook seeks to discredit Stockman by comparing him to Ron Paul. This is to be expected from a mainstream media pundit. What I did not expect and what set my heart aflutter was the following remark — more so because of its casual delivery:
The scope of the critique, while crazy, is undeniably impressive. It has a kind of logical integrity. Everything is worked out and all the connections explained. Stockman has been reading his economic history and his Austrian economics. Crucially, a lot of what he says really does make sense. In understanding the crash, for instance, the Austrian school’s emphasis on the role of the credit cycle looks right.
When a doctrine penetrates the thinking and writings of the intellectual class that communicates directly with the public — whom Hayek referred to as “second-handers in ideas” — it is well on its way to widespread public acceptance. With a new asset bubble already a-brewing with all its catastrophic aftereffects, the time draws near when mainline Austrian economics from Menger through Rothbard to current Mises Institute economists will triumph over current academic economics.
HT to Lew Rockwell.
In 2009, Lee Ohanian published the article, “What—or Who—Started the Great Depression,” in the prestigious Journal of Economic Theory (JET) in which he cited Murray Rothbard. For this article, Ohanian spent four years poring over wage data and culling information from sources related to Hoover and his administration. Based on his research, Ohanian argued that Hoover’s policy of propping up wages and encouraging work sharing “was the single most important event in precipitating the Great Depression” and resulted in “a significant labor market distortion.” In a Mises Daily article in September 2009, I called attention to the importance of Ohanian’s article. Here is part of what I wrote:
Ohanian contends that Hoover’s policy of propping up wages and encouraging work sharing “was the single most important event in precipitating the Great Depression” and resulted in “a significant labor market distortion.”
Thus, “the recession was three times worse — at a minimum — than it otherwise would have been, because of Hoover.”
The main reason is that in September 1931 nominal wage rates were 92 percent of their level two years earlier. Since a significant price deflation had occurred during these two years, real wages rose by 10 percent during the same period, while gross domestic product (GDP) fell by 27 percent. By contrast, during 1920–1921 — a period that was accompanied by a severe deflation — “some manufacturing wages fell by 30 percent. GDP, meanwhile, only dropped by 4 percent.”
As Ohanian notes, “The Depression was the first time in the history of the US that wages did not fall during a period of significant deflation.” Ohanian estimates that the severe labor-market disequilibrium induced by Hoover’s policies accounted for 18 percent of the 27 percent decline in the nation’s GDP by the fourth quarter of 1931.
Regarding the now-conventional explanations of the Great Depression, such as widespread bank failures and the severe contraction of the money supply, Ohanian points out that these two events did not occur to a significant extent until mid-1931, which was two years after the implementation of Hoover’s industrial labor market policies.
Moreover, Ohanian argues,
any monetary explanation of the Depression requires a theory of very large and very protracted monetary nonneutrality. Such a theory has been elusive because the Depression is so much larger than any other downturn, and because explaining the persistence of such a large nonneutrality requires in turn a theory for why the normal economic forces that ultimately undo monetary nonneutrality were grossly absent in this episode.
The conclusion of Ohanian’s paper is quite — one is tempted to say “hardcore” — Rothbardian.
The Great Depression that quickly superseded and distorted the benign recession-adjustment process was not in any sense caused by monetary deflation but by government-induced nominal wage rigidities, which of course can be temporarily circumvented by surreptitiously reducing real wages via unanticipated monetary expansion. Thus writes Ohanian:
I conclude that the Depression is the consequence of government programs and policies, including those of Hoover, that increased labor’s ability to raise wages above their competitive levels. The Depression would have been much less severe in the absence of Hoover’s program. Similarly, given Hoover’s program, the Depression would have been much less severe if monetary policy had responded to keep the price level from falling, which raised real wages. This analysis also provides a theory for why low nominal spending — what some economists refer to as deficient aggregate demand — generated such a large depression in the 1930s, but not in the early 1920s, which was a period of comparable deflation and monetary contraction, but when firms cut nominal wages considerably.
The “Cyprus deal” as it has been widely referred to in the media may mark the next to last act in the the slow motion collapse of fractional-reserve banking that began with the implosion of the savings-and-loan industry in the U.S. in the late 1980s. This trend continued with the currency crises in Russia, Mexico, East Asia and Argentina in the 1990s in which fractional-reserve banking played a decisive role. The unraveling of fractional-reserve banking became visible even to the average depositor during the financial meltdown of 2008 that ignited bank runs on some of the largest and most venerable financial institutions in the world. The final collapse was only averted by the multi-trillion dollar bailout of U.S. and foreign banks by the Federal Reserve.
Even more than the unprecedented financial crisis of 2008, however, recent events in Cyprus may have struck the mortal blow to fractional-reserve banking. For fractional reserve banking can only exist for as long as the depositors have complete confidence that regardless of the financial woes that befall the bank entrusted with their “deposits,” they will always be able to withdraw them on demand at par in currency, the ultimate cash of any banking system. Ever since World War Two governmental deposit insurance, backed up by the money-creating powers of the central bank, was seen as the unshakable guarantee that warranted such confidence. In effect, fractional-reserve banking was perceived as 100-percent banking by depositors, who acted as if their money was always “in the bank” thanks to the ability of central banks to conjure up money out of thin air (or in cyberspace). Perversely the various crises involving fractional-reserve banking that struck time and again since the late 1980s only reinforced this belief among depositors, because troubled banks and thrift institutions were always bailed out with alacrity–especially the largest and least stable. Thus arose the “too-big-to-fail doctrine.” Under this doctrine, uninsured bank depositors and bondholders were generally made whole when large banks failed, because it was widely understood that the confidence in the entire banking system was a frail and evanescent thing that would break and completely dissipate as a result of the failure of even a single large institution.
Getting back to the Cyprus deal, admittedly it is hardly ideal from a free-market point of view. The solution in accord with free markets would not involve restricting deposit withdrawals, imposing fascistic capital controls on domestic residents and foreign investors, and dragooning taxpayers in the rest of the Eurozone into contributing to the bailout to the tune of 10 billion euros. Nonetheless, the deal does convey a salutary message to bank depositors and creditors the world over. It does so by forcing previously untouchable senior bondholders and uninsured depositors in the Cypriot banks to bear part of the cost of the bailout. The bondholders of the two largest banks will be wiped out and it is reported that large depositors (i.e. those holding uninsured accounts exceeding 100,000 euros) at the Laiki Bank may also be completely wiped out, losing up to 4.2 billion euros, while large depositors at the Bank of Cyprus will lose between 30 and 60 percent of their deposits. Small depositors in both banks, who hold insured accounts of up to 100,000 euros, would retain the full value of their deposits.
The happy result will be that depositors, both insured and uninsured, in Europe and throughout the world will become much more cautious or even suspicious in dealing with fractional-reserve banks. They will be poised to grab their money and run at the slightest sign or rumor of instability. This will induce banks to radically alter the sources of the funds they raise to finance loans and investments, moving away from deposit and toward equity and bond financing. As was reported yesterday, this is already expected by many analysts:
One potential spillover from yesterday’s agreement is the knock-on effects for bank funding, analysts said. Banks typically fund themselves with some combination of deposits, equity, senior and subordinate notes and covered bonds, which are backed by a pool of high-quality assets that stay on the lender’s balance sheet.
The consequences of the Cyprus bailout could be that banks will be more likely to use contingent convertible bonds — known as CoCos — to raise money as their ability to encumber assets by issuing covered bonds reaches regulatory limits, said Chris Bowie at Ignis Asset Management Ltd. in London.
“We’d expect to see some deposit flight and a shift in funding towards a combination of covered bonds, real equity and quasi-equity,” said Bowie, who is head of credit portfolio management at Ignis, which oversees about $110 billion.
If this indeed occurs it will be a significant move toward a free-market financial system in which the radical mismatching of the maturities of assets and liabilities in the case of demand deposits is eliminated once and for all. A few more banking crises in the Eurozone– especially one in which insured depositors are made to participate in the so-called “bail-in”–will likely cause the faith in government deposit insurance to completely evaporate and with it confidence in fractional-reserve banking system. There may then naturally arise on the market a system in which equity, bonds, and genuine time deposits that cannot be redeemed before maturity become the exclusive sources of finance for bank loans and investments. Demand deposits, whether checkable or not, would be segregated in actual deposit banks which maintain 100 percent reserves and provide a range of payments systems from ATMs to debit cards. While this conjecture may we overly optimistic, we are certainly a good deal closer to such an outcome today than we were before the “Cyprus deal” was struck. Of course we would be closer still if there were no bailout and the full brunt of the bank failures were borne solely by the creditors and depositors of the failed banks rather than partly by taxpayers. The latter solution would have completely and definitively exposed the true nature of fractional-reserve banking for all to see.
In response to my Mises Daily last week on The International War on Cash, a reader recounted the following incident in an email:
Last month I paid the last of an old tax bill to the IRS in person. A sign on the desk said that they do not accept cash payments only check or credit cards.
Indeed on the IRS website the options for payment are listed in the following order: electronic payment options, check, money order, cashier’s check, or cash. The taxpayer is also warned, “Due to staffing limitations, not all local IRS offices accept cash.” Huh? One would think that it is more costly to deal with non-cash methods of payment. In any case, the last time I checked, the Federal Reserve Notes in my wallet all still bore the notice, “This note is legal tender for all debts public and private” This means that they cannot be refused by the creditor for repayment of a debt previously incurred–especially not for payment of taxes, which are the pre-eminent “public debt.” While the IRS may not be strictly in violation of legal tender laws, because one can still use cash to pay at some IRS offices, its anti-cash policy is just another tactic in the Federal government’s relentless war to stamp out cash payments.
Walter Block Mark Brandly Paul Cantor John Cochran Paul Cwik Thomas DiLorenzo Douglas French David Gordon Jeffrey Herbener Robert Higgs Hans-Hermann Hoppe Jörg Guido Hülsmann Peter Klein Hunter Lewis Thorsten Polleit Ralph Raico Joseph Salerno Timothy Terrell Mark Thornton Christopher Westley Thomas Woods